Discuss problems arising from IAS 17 Leases Essay

Discuss problems arising from IAS 17 Leases - Essay Example In a globalized economy leasing activities are increasing in magnitude as businesses strive to improve competitiveness through cost reduction and improved quality of products and services (IFRS Foundation, 2013a). Therefore, changes in accounting standards for leasing will influence the overall preparation of financial statements. Leasing is of great significance to the business entities. â€Å"It is a means of gaining access to assets, obtaining finance, and of reducing an entity’s exposure to the risk of asset ownership† (IFRS Foundation, 2013a, p.5). Initially, the prevailing accounting model for leases required the lessors and lessees to recognize and categorize leases either as finance leases or operating lease. Also, it required them to maintain a separate account for leases. The financing lease used to finance equipment for the most of its useful life and lessee would take the ownership of the equipment after the lease period. On the other hand, operating lease financed equipment for a period less that its useful life and lessee returned the leased equipment to the lessor without any obligation of transfer of ownership. However, the model failed to fulfill the needs of users because it did not recognize assets and liabilities relating to operating leases. This led to the adoption of IAS 1 17 Leases (IFRS Foundation, 2013a). The application of IAS 17, Leases requires the lessee to establish items and maintain track of all right-to-use assets. It requires comprehensive sub-ledgers and creates the need for the establishment of discrete â€Å"property, plant and equipment sub-ledgers for the right-to-use assets† (IFRS Foundation, 2013a, p. 5). In addition, the lessee has to establish a scheme to ascertain each lease as a component of right-to-use asset category. However, the International Accounting Standards 17 (IAS 17),